Emerging Markets: Now More Than Just Factories

Emerging markets boast more-diverse economies than they used to, making many better prepared to weather this year’s uneven commodity prices and industrial activity.

Shares of the South Korean cell phone maker are up 3% in 2014. The firm’s shipbuilding corporate cousin is down 27%, vividly illustrating the divergence between the new and old economies in emerging markets.

Shares of emerging markets firms as a group have rallied this year as investors shrugged off worries about slower growth from China and a sluggish industrial economy.

MSCI’s emerging markets index is up 5.3% year to date, lifted by gains in information technology firms (up 14%), consumer discretionary shares (up 6%), and health care (up 6%). Emerging markets companies that MSCI classifies as industrials, materials and energy, which together account for more than a quarter of the index, are up 1.9%.

The developing world has long been linked in investors’ minds to shipping companies, oil drillers, steelmakers because of the outsized role such firms play a in economies at a relatively early phase of industrialization. The tie also reflects the fact that the growth boom in emerging markets of the 2000s coincided with a once-in-a-generation surge in commodities prices, investors say.

Jack Deino, head of emerging markets debt at money manager Invesco Ltd., said it used to be that a sluggish materials sector almost always meant trouble for emerging markets. Now, economies are more diversified, companies and countries have strengthened their balance sheets, and “you’re not always on the edge of a cliff anymore.”